Three Factors Affect Urea Market      
By Zi Xiao

Long-term overcapacity  

The domestic urea prices fell from March to September 2009, with ex-factory prices dropping to as low as RMB1 450 per ton from a yearly high of around RMB2 000 per ton. Prices did not rise apparently even during peak fertilizer use season. However, domestic prices have risen a bit after the October 1st National Holiday due to stronger demand in some areas during autumn sowing, the upcoming low export tariffs and a buying spree by some dealers in northeastern China. Still, price increase is not expected to be big because there is excess supply in the market.
  Supply and demand situation is the most important and basic factor for the urea market. Though production had shown declining trend between July and September, urea output has increased month-on-month since October in response to increased urea prices. Overall, every month in 2009 has registered significant growth in output over a year earlier except January, leading to oversupply.
  Still, oversupply is a periodic event. Though there will be overcapacity in the long run, a supply shortage may also come in a short term. For example, most domestic companies have been in difficult condition in the second half with urea prices staying low, as some were forced to reduce operating rates or shut down production units. In addition, a shortage in natural gas supply forced some urea producers to stop operation for maintenance. The shortage in natural gas is a result of gas pricing reform and the earlier-than-expected snowfall nationwide. The plant running rates for the urea companies using natural gas as the feedstock in southwestern China averaged between 50% to 70%, and some plan to halt production by the end of December. As a result, urea output is expected to fall in the coming months.

The changing exports

Urea prices have risen in small margin on the international market recently, with FOB prices quoted at US$270 - 273/t Chinese ports at the end of November, shot up around US$8-10/t.
  Also, the overall exports situation is not optimistic in 2009. China exported 2.336 million tons of urea in the first 10 months of 2009, down 46.4% from a year earlier. China had a low export tariff during the July-September period. But the exports did not surge in July and August, when the nation exported 186 000 tons and 364 000 tons respectively. Exports hit 800 000 tons in September, an intra-year high.
   Exports could further improve in November and December as China maintains a low export tariff of 10% and the port FOB prices started to pick up. The change in exports would have a significant impact on domestic urea market.

Raw material costs  

The national power tariff (excluding residential power use) was raised by RMB0.028 per kWh, or around 4% on November 20th, 2009, the National Development and Reform Commission (NDRC) has announced. For domestic urea makers, each ton of urea requires power consumption of 1 000 kWh to 1 100 kWh. Production costs rose around RMB30 per ton for these companies after the price hike.
   The nationwide earlier-than-expected snowfall has also triggered coal demand and caused problems in transportation. The ex-factory prices (including freight) of anthracite have been raised to over RMB1 000 per ton recently, according to companies.
   The pricing reform on natural gas has long been at the center of market discussion. The NDRC said on November 19th that the reforming plan will probably be released in 2010. So the situation of tight gas supply will remain unchanged till the year-end as gas companies are expected to keep limiting supplies.
   As power and coal prices gradually increase, urea producers have to face higher production costs, which will in turn support urea prices.